Kim v. Pak

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE

In re the Marriage of:

KIUP ALEX KIM, Petitioner/Appellant,

v.

HYON PAK, Respondent/Appellee.

No. 1 CA-CV 23-0409 FC

FILED 11-26-2024

Appeal from the Superior Court in Maricopa County
No. FC2019-098222
The Honorable Quintin H. Cushner, Judge

AFFIRMED IN PART, VACATED AND REMANDED IN PART

COUNSEL

Berkshire Law Office, PLLC, Tempe
By Keith Berkshire, Alexandra Sandlin
Counsel for Petitioner/Appellant

Hoffman Legal, LLC, Phoenix
By Amy Wilkins Hoffman
Counsel for Respondent/Appellee
 KIM v. PAK
Opinion of the Court

OPINION

Presiding Judge Jennifer B. Campbell delivered the opinion of the Court, in
which Judge Kent E. Cattani and Judge Paul J. McMurdie joined.

C A M P B E L L, Judge:

¶1 Kiup Alex Kim (Husband) appeals the decree dissolving his
marriage to Hyon Pak (Wife). He challenges the superior court’s
classification and division of certain properties. The trial court found that
the profits from Husband’s separate property business during the marriage
were transmuted into community property, and the properties acquired
with those profits were community assets. We hold that the court erred by
making this finding without first apportioning the profits into separate and
community property. We vacate the portions of the order classifying and
dividing the properties and remand for further proceedings consistent with
this opinion.

BACKGROUND

¶2 Husband and Wife married in April 2014 and had two
children. In December 2019, Husband petitioned to dissolve the marriage.
1

The court held a bench trial to resolve the contested issues, including
dividing the parties’ assets. This is the only issue on appeal.

¶3 Husband is a vascular surgeon, and before the marriage, he
opened a medical practice—Advanced Minimally Invasive Surgical, LLC
(AMIS).2 Before the marriage, Husband created Endovascular Medical, LLC
(Endovascular), which held title to and managed a commercial property.
During the marriage, Husband used funds derived from AMIS to buy
several commercial properties. As he had with Endovascular, he created
multiple limited liability companies to hold title to and manage the
properties.

1 The couple held a wedding ceremony in 2012 but were not legally
married until April 2014.
2 Husband maintained in superior court that he was a phlebologist,
not a vascular surgeon, and that phlebologists are paid significantly less.
The court found that Husband was a vascular surgeon based on reasonable
evidence, and he does not challenge that finding for purposes of this appeal.

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Opinion of the Court

¶4 The parties disputed the nature of the five properties—all
acquired during the marriage—seeking opposing determinations about
whether they were community or Husband’s separate property. The parties
also disputed whether the commercial property held by Endovascular was
a community or separate asset. Seeking answers to these questions, the
parties retained a joint expert to evaluate the businesses and perform
forensic tracing of the community and separate property. Both Husband
and Wife later hired their own experts to perform a similar analysis.

¶5 At trial, the court received evidence from both Husband and
Wife, as well as Husband’s expert and the joint expert regarding the nature
of the properties and the couple’s finances.3 The court issued a dissolution
decree, which adopted the joint expert’s conclusions that (1) a Rueschenberg
apportionment was not necessary, and (2) extensive “commingling
between and among personal accounts, AMIS, and the holding companies
. . . render[ed] a tracing of sole and separate and community funds
unreliable.” See Rueschenberg v. Rueschenberg, 219 Ariz. 249 (App. 2008). The
court found that the five properties acquired during the marriage were
community property. The court confirmed that Endovascular was
Husband’s sole and separate property but found the community had
acquired “an equitable lien [against the property] equal to the amount spent
increasing [its] equity from the community and commingled accounts.”
Husband timely appealed.

DISCUSSION

¶6 Husband argues the trial court erred by declining to
apportion AMIS’s profits during the marriage into community and separate
property. Husband asserts that without apportioning the profits, tracing
the separate property portion was impossible to show that the later-
acquired commercial properties were his separate property. He contends
the court committed clear error by finding that the properties were
transmuted into community property because of the extensive
commingling and failing to credit him for his separate property
contributions. We agree.

3 Wife’s expert’s report was admitted into evidence at trial, but she did
not testify. In her report, she reached the same conclusions as the joint
expert, and the court gave it little weight because she did not testify and her
report “did not contain the same amount of detail as” the joint expert’s
report.

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Opinion of the Court

¶7 We review de novo the trial court’s characterization of
property as separate or community, but we review the court’s division of
that property for an abuse of discretion. Whitt v. Meza, 257 Ariz. 149, 157,
¶ 27 (App. 2024). We will not reweigh evidence on appeal and will uphold
the court’s findings of fact absent clear error. Kelsey v. Kelsey, 186 Ariz. 49,
51 (App. 1996). “We will defer to the trial court’s determination of
witnesses’ credibility and the weight to give conflicting evidence.” Gutierrez
v. Gutierrez, 193 Ariz. 343, 347, ¶ 13 (App. 1998).

¶8 Property owned before marriage is separate property,
as is that property’s subsequent “increase, rents, issues and profits”
occurring during a marriage. A.R.S. § 25-213(A). When it comes to a
separate-property business, the business’s profits or increase in value
during marriage are considered separate property if generated by the
“inherent qualities of the business,” but community property if generated
by the “individual toil” of either spouse. Rueschenberg, 219 Ariz. at 252, ¶ 12
(citation omitted). If an asset is acquired during marriage with the profits
of a separate-property business, and those profits contain both separate and
community funds, the value of the acquired asset “must be apportioned
accordingly.” Cockrill v. Cockrill, 124 Ariz. 50, 54 (1979); see also Nace v. Nace, 104 Ariz. 20, 23 (1968). In apportioning the asset, the court must determine
what percentage of the funds used to acquire the asset came from the
separate-property portion and what percentage came from the community-
property portion. See Cockrill, 124 Ariz. at 54. Then the court must distribute
the asset to the community- and separate-property estates based on those
percentages. See id.

¶9 Separate property may be transmuted into community
property when it is commingled so much that its “identity . . . as separate
or community is lost.” In re Marriage of Cupp, 152 Ariz. 161, 164 (App. 1986).
When commingling occurs, the entire fund becomes community property
“unless the separate property can be explicitly traced.” Porter v. Porter, 67
Ariz. 273, 281 (1948); see Cooper v. Cooper, 130 Ariz. 257, 259–60 (1981) (“[T]he
burden is upon the person claiming that the commingled funds, or any
portion of them, are separate to prove that fact and the amount by clear and
satisfactory evidence.”).

I. AMIS is Husband’s Separate Property.

¶10 AMIS being Husband’s separate property is undisputed. All
experts agreed that AMIS declined in value throughout the marriage. The
joint expert attributed a portion of the decline in value to Husband and his
staff shifting their focus from medical-service provision to “purchasing,

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Opinion of the Court

renovating, and managing [] properties.” The court did not err in ruling
that AMIS was Husband’s separate property, and because it declined in
value, there was no community interest in the business. See Cockrill, 124
Ariz. at 52 (“[T]he separate property of the spouse remains separate. It is
merely the profits or the increase in value of that property during marriage
which may become community property . . . .”) The court properly
allocated all interest in AMIS to Husband.

II. AMIS’s Profits Must Be Apportioned.

¶11 We now address Husband’s argument that the court was
required to apportion AMIS’s profits during the marriage into community
and separate property before engaging in its tracing analysis. For the
reasons discussed below, we agree with Husband and vacate the portions
of the trial court’s order classifying and dividing the five properties
purchased during the marriage.

¶12 Despite decreasing in value, AMIS generated about $4 million
in profits during the marriage.4 The experts agreed that only $360,000 of the
profits went to the community and the rest went to acquiring the five
commercial properties.5 But the experts disagreed on the amount they
believed was reasonable compensation for Husband’s work as a physician
during the marriage—Husband’s expert concluded: $1.8 million ($1.3
million after taxes) and the joint expert concluded: $2.9 million ($2 million
after taxes). All experts agreed that the community was undercompensated
for Husband’s work as a physician, as it received only $360,000 out of either
$1.3 million or $2 million in after-tax reasonable compensation.

¶13 As set forth above, the experts agreed that AMIS’s $4 million
in profits during marriage exceeded Husband’s reasonable compensation
as a physician. Regarding those excess profits, Husband’s expert
determined that 65% resulted from Husband’s toil in managing AMIS, and
35% resulted from AMIS’s inherent qualities—its “associate physicians”
and “30 to 40 [total] employees.” The joint expert acknowledged that some
of the profits were “sole and separate . . . based on the investment return
attributable to the practice.” It is undisputed that some of AMIS’s profits
were Husband’s separate property. But the joint expert did not apportion
the profits into separate and community portions. She took a backward-

4 We round the figures in this section for simplicity.
5 In addition to purchasing the five properties, during the marriage,
$515,687 of the profits went to pay off the Endovascular property’s
mortgage. We will address the parties’ interests in Endovascular later.

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Opinion of the Court

focused assessment and determined that all of the profits from AMIS had
been transmuted to community property through extensive commingling.
This assessment is wrong as it neglects to account for Husband’s
undisputed sole and separate interest in the $4 million that AMIS produced
over the marriage.

¶14 True, to receive a separate interest in the five properties
purchased during the marriage, Husband had to show that they were
purchased in whole or part with identifiable separate funds. See Nace, 104
Ariz. at 23 (“Property purchased during marriage with separate property
remains such.”); Cupp, 152 Ariz. at 164 (presuming property acquired
during marriage is community). The joint expert determined that Husband
could not make that showing because the profits from AMIS were too
extensively commingled before being used to purchase the properties. See
Cupp, 152 Ariz. at 164. However, by making that determination at the start
of her analysis, the joint expert ignored any investment return attributable
to Husband’s sole and separate property and the ability to identify its
subsequent “increase, rents, issues and profits” during marriage. A.R.S.
§ 25-213(A). It is undisputed that AMIS produced $4 million in profits
throughout the marriage—making the profits from the business identifiable
and apportionable. This is precisely why our courts require the separate
and community portions of hybrid profits to “be apportioned accordingly.”
Cockrill, 124 Ariz. at 54. The joint expert’s analysis was fatally flawed as she
missed the required first step—apportioning the profits from AMIS. See id.

¶15 On the other hand, Husband’s expert began with an
apportionment analysis. In doing so, he assumed that 65 percent of
distributions from AMIS were community property and 35 percent were
separate property. From there, he allocated all transfers from accounts
“pro-rata, based on the [separate] or community funds in the account.”

¶16 The court disapproved of Husband’s expert’s analysis,
finding that it did not sufficiently demonstrate “that the funds used to
acquire the properties . . . could be traced to [AMIS]” because it “contained
assumptions, including the assumption that . . . distributions [from AMIS
were] 65 percent community.” The court then adopted the joint expert’s
analysis and awarded Wife a 50% community interest in each of the five
properties. This was an abuse of discretion.6

6 The court was not bound by the percentages found by the expert,
and we render no opinion on whether Husband’s expert came to the correct

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Opinion of the Court

¶17 To begin, explicit tracing does not require documenting every
transaction dollar-for-dollar, as courts may consider circumstantial
evidence in determining whether there is “clear and satisfactory evidence”
that the separate property maintained its identity. See Cooper, 130 Ariz. at
259–60; Whitt, 257 Ariz. at 154–55, ¶¶ 16–17 (finding that although
community funds were added to an account, $39,400 remained separate
funds because the account’s balance never fell below $39,400 and nothing
showed that the account was used for separate expenditures during the
marriage). Moreover, the assumption the court found unreliable here—
Husband’s expert’s allocation of AMIS’s profits into separate and
community portions—was exactly what was required. It was an
apportionment of the separate-property business’s profits that both Cockrill
and Rueschenberg mandate. While a trial court may disagree with the
method or amount of a proposed apportionment, it cannot forgo
apportionment entirely and award the community all profits from a
separate-property asset, as the court did here. See Cockrill, 124 Ariz. at 54;
Rueschenberg, 219 Ariz. at 255, ¶¶ 24–26.

¶18 In other words, because the $4 million in distributions from
AMIS were not initially divided by their separate and community character,
and the distributions undisputably contained both separate and
community property, the court was required to determine the separate and
community portions and allocate them to the respective estates
accordingly. See Cockrill, 124 Ariz. at 54; Rueschenberg, 219 Ariz. at 255, ¶ 24.
The community was entitled to the value of Husband’s reasonable
compensation for his work as a physician, which Husband’s expert
concluded was $1.8 million ($1.3 million after taxes) and the joint expert
concluded was $2.9 million ($2 million after taxes). Once the court
determines the amount of reasonable compensation, it must then determine
how to appropriately apportion the remainder between the community and
Husband’s separate-property estate. Only then, once the separate portion
of the distributions is identified, can they be traced to the funds used to
purchase the five properties. See Porter, 67 Ariz. at 282–83 (tracing analysis
hinges on whether the court can “determine which portion of the combined
fund is separate and which is community”). The court abused its discretion
by adopting the joint expert’s analysis, which forewent apportionment and
concluded that the funds were commingled and transmuted into
community property. See Hammett v. Hammett, 247 Ariz. 556, 559, ¶ 13 (App.

conclusion. We only note that the methodology used by Husband’s expert
was sound.

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Opinion of the Court

2019) (“A trial court abuses its discretion when it misapplies the law or
predicates its decision on incorrect legal principles.” (citation omitted)).

¶19 On remand, the court must first determine what amount of
the $4 million in distributions resulted from Husband’s work as a physician
during the marriage. That amount goes to the community, and the
remainder of the profits need to be apportioned between the community
and Husband as his sole and separate property. Only then, once the
required apportionment has been conducted, can the court determine the
character of the five properties acquired during the marriage. To further
complicate this analysis, the court must also determine how much of
Husband’s toil and effort contributed to acquiring and managing those
properties and credit the community accordingly. But again, the first step
in the process is apportioning the $4 million generated by AMIS throughout
the marriage into Husband’s separate property and the community
property interests. We remand this portion of the court’s orders.

III. AMIS’s Profits Must Be Apportioned to Divide Endovascular
Medical, LLC.

¶20 As for Endovascular, Husband bought the property and
formed the LLC before the marriage, and the court found it was Husband’s
separate property. The court made the following findings in determining
whether there was an equitable lien in favor of the community and, if so,
for how much. Husband purchased the property for $1.5 million, which
was also its value on the date of marriage. There were $515,687 in net
community contributions paid toward the mortgage during the marriage.
At the end of the marriage, the property was valued at $3.65 million.

¶21 The community may acquire an equitable lien against
separate property when it contributes capital toward the property. Tester v.
Tester, 123 Ariz. 41, 43 (App. 1979). Even still, there is no lien if the separate-
property holder traces the funds and shows by clear and convincing
evidence that the contributions came from separate property. See Noble v.
Noble, 26 Ariz. App. 89, 95–96 (1976). Husband argues the equitable lien was
improper because it was “calculated based off of 100% of the profits of
AMIS being treated as community,” and doing so was error because the
court did not apportion the profits into community and separate portions
as required by Cockrill and Rueschenberg before calculating the amount of
the lien. We agree.

¶22 For the same reasons discussed above, the court was required
to apportion AMIS’s profits first before concluding that all funds had been

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Opinion of the Court

transmuted into community property. See Cockrill, 124 Ariz. at 54;
Rueschenberg, 219 Ariz. at 255, ¶ 24. Here, the court found that the “amount
spent increasing the [Endovascular] property’s equity [came] from the
community and commingled accounts.” It then used a Drahos calculation to
determine the community’s $1,254,838.37 equitable lien against
Endovascular.7 See Drahos v. Rens, 149 Ariz. 248 (App. 1985).

¶23 Because the contributions to Endovascular during the
marriage came from AMIS’s profits, the court abused its discretion by
forgoing apportionment and crediting the community for the entire amount
of the contributions. See Noble, 26 Ariz. App. at 86 (“[P]ayments for separate
uses out of an account containing traceable community and separate funds
are deemed to be paid out of separate funds.”). We vacate the portion of the
trial court’s order awarding the community a lien of $1,254,838.37 against
Endovascular. We remand for the court to recalculate the lien once it
apportions the profits from AMIS and then determines the community and
separate interests in Endovascular.

CONCLUSION

¶24 For these reasons, we vacate the portions of the decree dealing
with the division of the property listed above and remand for further
proceedings consistent with this opinion. Under A.R.S. § 25-324, both
parties request attorneys’ fees on appeal. In our discretion, we deny both
requests but award Husband his taxable costs upon compliance with
ARCAP 21.

AMY M. WOOD • Clerk of the Court
FILED: AGFV

7 The Drahos formula for calculating the community lien in algebraic
form is C + [C/B x A]. Barnett v. Jedynak, 219 Ariz. 550, 554, ¶ 16 (App. 2009).
In this formula, A = appreciation in value of the property since purchase; B
= the property’s purchase price; and C = community contributions to the
principal. Id. Applied here: $515,687 + [($515,687/$1,500,000) x ($3,650,000
- $1,500,000)] = $1,254,838.37.

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